Customs implications of mixed-origin goods in trade agreements

Nowadays, the production of merchandise often covers multiple countries, resulting in the diversification of suppliers, as we discussed last week, or resulting in products composed of inputs from various origins. 

These mixed-origin goods present unique challenges and opportunities within the framework of international trade agreements. Determining the correct origin of a product is critical not only for complying with customs regulations but also for accessing preferential tariffs and avoiding penalties. However, the rules governing origin can be complex and vary significantly across jurisdictions.

In this article, we’ll explore the customs implications of mixed-origin goods, focusing on how origin is determined, the role of rules of origin in trade agreements, and the practical and legal consequences for businesses engaged in cross-border trade.

Understanding mixed-origin goods

As we mentioned, the production of products frequently involves multiple countries, each contributing components, materials, or processing steps to a final product. In other words, mixed-origin goods are products that cannot be classified as wholly obtained or produced in a single country. 

This merchandise exemplifies the complexity of modern supply chains, where raw materials are sourced in one region, processed in another, and assembled in a third before being distributed to consumers worldwide.

Mixed-origin goods challenge traditional customs and trade classification systems, which were originally designed for simpler manufacturing and sourcing processes. The designation of origin is no longer a straightforward matter of identifying where a product was made; instead, it often requires a nuanced assessment of the value added in each stage of production and the nature of the transformations that occurred across borders. 

The classification of goods as mixed-origin has significant implications not only for Mexican customs brokers, customs duties, or tariff treatment, but also for trade statistics, labeling, and legal accountability. 

What are the rules of origin (ROO)?

Rules of origin (ROO) are the criteria used to determine the national source or “economic nationality” of a product for purposes of international trade. These rules play a critical role in implementing trade policy measures. 

In essence, they establish the conditions under which a product qualifies as originating from a particular country, which in turn determines the level of customs duties or whether it can benefit from tariff reductions or exemptions.

Preferential rules of origin apply within the context of trade agreements and determine whether the merchandise is eligible for reduced or zero tariffs based on its origin. Non-preferential rules, on the other hand, are used for purposes such as applying most-favored-nation (MFN) rates, enforcing trade remedies (like anti-dumping duties), or imposing import restrictions based on public health, security, or environmental concerns.

ROO can vary significantly between agreements and legal systems, but they typically rely on several core criteria to determine origin. The most common are:

• Wholly obtained or produced: Goods entirely produced in one country (e.g., agricultural products, minerals).
• Substantial transformation: A product undergoes significant processing that changes its nature or functionality.
• Change in tariff classification (CTC): The final product falls under a different tariff heading than its components.
• Regional value content (RVC) or value-added thresholds: A minimum percentage of the good’s value must be added in the country claiming origin.
• Specific processing operations: Certain processes are explicitly required (or disallowed) for the origin to be conferred.

Determining the origin of mixed-origin goods

For determining where the origin of a mixed product is, the most common factor to consider is where the substantial transformation of the product occurred, in other words, where it acquired its essential character or underwent a significant economic change. It refers to a process that results in a new and distinct article of commerce, with a different name, use, or character compared to the imported inputs. 

However, interpreting what qualifies as a substantial transformation can be challenging, as it often depends on the ROO, as we saw above. For example, simple assembly or repackaging might not be enough to confer origin, while chemical processing or complex manufacturing might suffice. To bring objectivity and standardization to this process, many trade agreements use technical criteria such as:

• Change in tariff classification (CTC): The finished product must fall under a different Harmonized System (HS) code than its inputs. This method is widely used, although it can be restrictive depending on how HS codes are structured.
• Regional value content (RVC): The product must meet a minimum threshold of value added in the country of export. This calculation often involves comparing the value of non-originating materials to the final ex-works or FOB price of the goods.
• Specific processing rules: Some agreements outline mandatory operations that must take place for a product to be considered originating, especially in sensitive sectors such as textiles, automobiles, or electronics.

One important tool to facilitate origin determination is accumulation (or cumulation), which allows producers to count inputs or processing from multiple countries within a trade agreement as originating. 

Strategic considerations for businesses

For companies operating in global markets, mixed-origin goods present both compliance challenges and strategic opportunities. Proper origin planning can unlock preferential tariff rates under free trade agreements, reduce costs, and improve competitiveness in global markets. 

Businesses should evaluate their supply chain structures to identify opportunities where sourcing or processing in partner countries could help meet origin requirements more efficiently. 

Collaborating with customs brokers, legal advisors, and suppliers is key to ensuring accurate documentation and consistent compliance with applicable rules of origin. Additionally, companies should stay informed about changes in trade agreements, as origin rules may be updated or renegotiated, impacting eligibility and cost structures.

Now that you’ve learned more about mixed-origin products, don’t hesitate to contact us. We are specialists in customs compliance and international trade. Also, if you found this article useful, share it on social media and stay tuned to our blog for more information.